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Turkey: Calm After The Storm

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One of the more surprising outcomes of Turkey's failed coup of July 15 is that—as with Britain’s surprise vote to leave the European Union—the initial economic fallout has not been near as bad as many feared. True, the Turkish lira and Borsa İstanbul plunged, the latter by around 3% within minutes of opening on July 18. But in the days and weeks since then, the mood has been relatively calm, with investors in search of higher yields looking anew at Turkey (yields on Turkish bonds are currently around 9.5%-10%). As Global Finance went to press, the lira was holding firm against the US dollar and other currencies, having recovered almost all its post-July 15 losses.

“The disruptive slowdown in capital inflows that one would perhaps have expected simply hasn’t happened,” says William Jackson, Turkey analyst at Capital Economics in London. “The currency has been strengthening, and the Central Bank hasn’t had to hike interest rates to protect it.”

Indeed, with the government and central bank both focused on boosting growth, the latter has continued with its policy of cutting interest rates, knocking a further 25 basis points off the overnight lending rate on August 23, bringing the total cuts to 225 bp since March, and the overnight rate to 8.5%. The key question is what happens next.

One big area of concern remains the current-account deficit, currently around 4.4% of GDP, which was on a rising trend even before July, increasing from $2.9 billion in May to $4.9 billion in June. This deficit growth is being fueled both by strong consumer demand for imports and the collapse in receipts from tourism (even before the failed coup, reports were suggesting income could contract by some $15 billion from 2015). It is possible that pressure on the current account could ease as domestic demand falls—car sales fell some 30% in July after a 7% rise in June, while manufacturing purchasing manager indexes for August saw the sharpest slowdown since July 2009.

Observers say it is too soon to gauge the full picture. However, it is clear that GDP growth is ailing, with second-quarter growth slowing to 3.1%—below consensus—and the third and fourth quarters expected to show even-more-subdued activity. Jackson expects full-year GDP at 3% before slowing further next year, with inflation showing an uptick to 8.3% this year and 8.8% next.

“The key concern is that with domestic savings remaining low, Turkey remains vulnerable to a slowdown in the capital inflows on which it so crucially depends,” says Jackson. “Policymakers will need to do all they can to avert this happening.”

Still, in early September, Moody’s—which will issue its latest sovereign rating for Turkey later in the fall—indicated that early signs suggest the impact of the coup attempt on foreign entities operating in Turkey will be fairly minimal, pointing to the inelastic demand for many of the products. Knowing how important foreign direct investment is to Turkey’s economy, policymakers will be hoping such findings also mean little disruption in long-term investment and FDI plans.